FLL

Business Context and Reporting Period

Company: Full House Resorts, Inc. (FHR)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2010
Business Overview: FHR owns, manages, and invests in gaming-related opportunities. Key operations include Stockman's Casino in Nevada, a consolidated 50% joint venture (GEM) managing the FireKeepers Casino in Michigan, and a non-consolidated 50% equity interest in Gaming Entertainment Delaware, LLC (GED). The company also holds notes receivable related to tribal casino development projects.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Surge: Total revenues increased 249% year-over-year, driven primarily by $12.2 million in management fees from the FireKeepers Casino (GEM), which opened in August 2009. This offset an 11% decline in casino and food/beverage revenues at Stockman's Casino due to economic weakness in Northern Nevada.
• Profitability: Net income attributable to the Company increased 395% to $3.48 million. Operating income rose from $1.29 million to $11.23 million.
• Debt Reduction: The company repaid all outstanding debt to its joint venture affiliate (RAM) and had no long-term debt outstanding as of June 30, 2010, compared to $1.45 million in current debt at year-end 2009.
• Cash Position: Cash and equivalents increased by $6.15 million, bolstered by strong operating cash flows and a $5.0 million repayment of tribal advances from the FireKeepers Development Authority.
• Asset Valuation: The company recorded an unrealized loss of $31,118 on the Nambe Pueblo note receivable due to project delays, while the Northern Cheyenne note receivable remains written down to zero.

Outlook, Risks, and Management Commentary

• Management Commentary: Management attributes the strong performance to the successful operation of FireKeepers. The company expects to continue receiving management fees with a minimum guaranteed 5% growth rate for the Delaware operation through August 2011.
• Legal Proceedings: In April 2010, an arbitrator ruled in FHR's favor regarding a dispute with Harrington Raceway Inc. (HRI) over management fee calculations, confirming FHR is entitled to the greater of actual fees or prior year fees plus 5%. However, the arbitrator declined to award attorney's fees.
• Project Risks:
  • Nambe Pueblo: Project opening delayed to Q3 2011; fair value of note receivable estimated at $0.4 million. No assurance of repayment.
  • Northern Cheyenne: Project feasibility is uncertain due to credit market conditions; assets written down to zero in 2009.
• Economic Risks: The company cites severe recessionary conditions, weakness in consumer spending, and reduced credit availability as significant risks to future operations and growth plans.
• Banking Risk: FHR holds significant cash at Nevada State Bank (NSB), a subsidiary of Zions Bancorporation, which received a "D" (weak financial strength) rating from Weiss Ratings in July 2010. However, deposits are FDIC insured.

Key Facts for Investor Verification

• Revenue Concentration: Verify the sustainability of management fee revenue from FireKeepers (Michigan) and Harrington (Delaware), which now constitute the vast majority of total revenue.
• Tribal Receivables: Assess the collectability of the remaining $0.4 million note receivable from the Nambe Pueblo, given the project delays and lack of operational revenue.
• Banking Exposure: Confirm the safety of the $13.8 million cash balance held at Nevada State Bank despite the bank's weak credit rating.
• Contract Expirations: Note that the Delaware management contract expires in August 2011 and the Michigan contract in August 2016; verify renewal probabilities.
• Non-Controlling Interest: Understand that a significant portion of consolidated net income ($5.08 million for the six months) is attributable to the non-controlling interest in the GEM joint venture, reducing the net income available to FHR shareholders.